Did liquidated damages paid by a seller for breaching a sales contract reduce the California use-tax measure?

Plain-English summary

The stated contract price remained the sales price used to measure California use tax even though the contract required the seller to pay liquidated damages for breaching other terms.

The letter treated damages as separate from the property's selling price. A damages award after litigation or a seller payment settling the purchaser's damage claim did not reduce taxable sales price, even when the parties called the payment a "voluntary price adjustment."

Tax counsel therefore rejected treating the liquidated-damages clause as a pricing mechanism and confirmed that the original contract price controlled.

Citations and references

• California Revenue and Taxation Code section 6011 (as cited)
• Southern California Edison Co. v. State Board of Equalization, 7 Cal.3d 652 (as cited)
• Board's July 28, 1976 advice to the requesting district's deputy general counsel and conflicting prior Board advice — identified; advice, request, correspondence, authors, complete positions, and attachments not reproduced in the official PDF
• Stated contract price, tangible personal property, seller breach, liquidated-damages provision, possible litigation award, damage claim, settlement payment, and “voluntary price adjustment” — facts and hypotheticals supplied; contract, property, prices, clause, performance and breach records, claim, pleadings, award, settlement, payment records, returns, and tax computations not reproduced in the official PDF
• Official Annotation 295.0210's stated-contract-price, sales-or-use-tax measure, liquidated-damages, seller-breach, and no-sales-price-effect summary, dated July 30, 1976, with “Am. 2004–2” notation — annotation expands the stated tax scope from the opinion's use-tax question and omits the July 28 and conflicting-advice provenance, statutory definition, litigation/settlement analysis, case authority, missing records, and amendment text or explanation and supplies no additional transaction record
• Possible later corrected advice, execution or breach of the contract, damages claim or payment, litigation, settlement, return filing, audit, assessment, payment, refund claim, appeal, 2004 amendment record, or other agency action — not supplied in the official PDF

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/295-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/295-0210.pdf

Original ruling text

295.0210

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
PO BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001
TELEPHONE (916) 445-2641

July 30, 1976

Mr. G--- F--Deputy General Counsel
M--- W--- District
P.O. Box XXXXX
--- ---, California XXXXX

Dear Mr. F---:
SS -- XX XXXXXX
This will confirm our advice to you of July 28, 1976. The question has arisen as to whether liquidated damages may be offset against the stated contract price of tangible personal property in determining the measure of California use tax. You have received conflicting advice from this Board. The California use tax is measured by the “sales price” of tangible personal property. Revenue and Taxation Code Section 6011 defined “sales price” to mean the total amount for which tangible personal property is sold, valued in money, whether paid in money or otherwise, without any deduction on account of the cost of any expense. The total amount for which property is sold includes any amount for which credit is given to the purchaser by the seller. It is the position of this Board that the stated contract price of tangible personal property is the “sale price” subject to the use tax without regard to the fact that breach of certain terms of the contract by the seller may occasion operation of a liquidated damages provision. It is clear that a reduction of the selling price of tangible personal property is not effected by an award of damages resulting from litigation concerning the contract or by a payment by the seller to the purchaser in settlement of claims for damages made by the purchaser. This rule applies even where the parties characterize the settlement payments as “voluntary price adjustments.” See Southern California Edison Co. v. State Board of Equalization, 7 Cal.3d 652.

Mr. G--- F---

-2-

July 30, 1976
295.0210

It is our view that a liquidated damages provision may not be regarded for sales and use tax purposes as a pricing mechanism. We apologize for any inconveniences which our prior advice on this subject may have occasioned you. Very truly yours,

Gary J. Jugum
Tax Counsel
J:alicetilton
cc:

Mr. T. P. Putnam
Assistant Chief Counsel
State Board of Equalization

bc:

-- – District Administrator